Monetary Policy and Treasury Yields
The uncertainty over monetary policy has been the largest factor preventing the next break out in gold prices. Precious metal spot prices and exchange traded instruments that track them like GLD and SLV have been under immense pressure for months, following years of relatively steady inclines. That is not to say hiccups or stagnation like the present situation are unparalleled in recent history. In fact much steeper negative volatility has plagued the metal markets over the last decade's bull run, but declines and stagnation have always been temporary as the credit markets wrestle with the conviction of monetary policy until it distinctly settles.
At times the Federal Reserve is ahead of the curve, providing more than enough liquidity to sustain and help foster growth in credit markets, despite such investments being largely unsound. Other times the Fed is behind the curve, and needs to play catch up in their fight to bring down the value of the dollar and longer term interest rates.
At present the Fed is behind its goals, with interest rates and the dollar on the rise:
Rising real interest rates is probably the largest factor contributing to weakening metal prices recently. The rising rate trend has led to divestment from gold by major funds like Soros Fund Management, which withdrew 55% of its stake in Q4 of 2012 in GLD, but still retains a whopping 600,000 shares, however.
Central Banks Pickup Slack, Sustain Price Floor
Despite all this selling pressure and negative media around gold, precious metal prices have held up quite well considering. Prices are well supported by private and public entities who jump on falling metal prices as an opportunity to continue their long term accumulation plans at discounts.
Gold has held a price floor of about $1,487, not breaching these levels for 18 months:
Much of this support comes from bidding by central banks, whose gold buying is at a 48 year high with 535 tonnes added last year alone, a 17% increase from 2011, according to the World Gold Council. Russia has been the largest sovereign buyer of the metal recently, currently the 8th largest gold holder with 957.8 tonnes which accounts for 10% of its total foreign exchange reserves.
Gold and Currency Wars
In some respect Russia and other emerging markets seem to be using gold accumulation as a means of playing the currency wars. While countries like the U.S. and Japan are en route to debase their currencies and cheapen the massive outstanding debts they owe, Russia's debt is tiny in relation, representing only 10% of its GDP.
In the highly acclaimed book, "Currency Wars by Jim Rickards," Rickards speculates that Russia could strategically accumulate gold to sway economic powerhouses in the East to move on to a gold standard of sorts and crush the monetary influence of the West, namely Europe and America.
Putin has made remarks over the years that make this outcome seem more likely than mere speculation. According to a 2005 Kermlin transcript, Putin reportedly told Bank Rossii, Russia's central bank, that it should not "shy away" from gold since "after all, they're called gold and currency reserves for a reason."
In addition, a member of Putin's United Russia party said that gold ownership is strategically desired as a measure of sovereignty. Now that Russia is the largest gold accumulator this route is maybe being expedited.
Bernanke Eases Hawkish Fears at G20, Affirming Stimulus
The G20, from its meeting in Moscow, issued a statement claiming:
"We will refrain from competitive devaluation. We will not target our exchange rates for competitive purposes, will resist all forms of protectionism and keep our markets open."
To the astute reader the G20 is really saying that competitive devaluation is acceptable, as long as the excuse is protecting your domestic economy, not competing on the international stage, despite how ridiculous this separation may sound. Given that the G20 has proven unwilling to single out major members for their monetary policy discretion, central bank heads need no longer fear geopolitical scrutiny in conjunction with their record stimulus measures.
Ben Bernanke took time at the G20 meeting itself to affirm his stance on monetary policy remaining aggressively loose. With so much vocal support by the Fed for stimulus the big question of where monetary policy is headed in the U.S. should not be as confusing as global markets seem to believe. All one needs to do is watch what the Fed is doing, and listen to what the Fed is saying.
Janet Yellen, the Fed's vice chairwoman, recently made her views clear, claiming monetary policy should carry the weight Congress is failing to, and emphasized that stimulus will likely remain even after employment guidelines are met. Now Ben Bernanke, the Fed's chairman is out reminding markets of the Fed's failure to reach its employment goals, and that much is left to be done. Bernanke said:
"With unemployment at almost 8 percent, we are still far from the fully healthy and vibrant conditions that we would like to see."
He went on to say that if the U.S. can kickstart their economy via stimulus, the rest of the world will prosper as a result. This seams to wrap up any confusion as to whether or not the Fed will be tightening monetary policy any time soon.
Where are Gold Prices Headed
Given the Fed's printing trajectory, at least $85 billion dollars a month, and increased reason to believe it will sustain or grow, it is just a matter of time before it gets ahead of the curve again, raising bonds prices back up with gold prices likely to join in on the journey. I suspect it will not take longer than the first quarter of 2013 before gold finds its direction back in line with the decade's historical trend.